Demand for Weather Hedges in India: An Empirical Exploration of Theoretical Predictions

33 Pages Posted: 15 Aug 2013

See all articles by Ruth Vargas Hill

Ruth Vargas Hill

World Bank

Luis Miguel Robles

World Bank Group; International Food Policy Research Institute (IFPRI)

Francisco Ceballos

International Food Policy Research Institute (IFPRI)

Date Written: July 1, 2013

Abstract

Income risk is substantial for farmers in developing countries. Formal insurance markets for this risk are poorly developed, and as a result there has been an increasing trend to sell weather hedges to smallholder farmers to manage their risk. This paper analyzes the demand for rainfall-based weather hedges among farmers in rural India. We explore the predictions of a standard expected utility theory framework on the nature of demand for such products, in particular testing whether demand behaves as predicted with respect to price, the basis of the hedge, and risk aversion using data from a randomized control trial in which price and basis risk was varied for a series of hedging products offered to farmers. We find that demand behaves as predicted, with demand falling with price and basis risk, and appearing hump-shaped in risk aversion. Second, we analyze understanding of and demand for hedging products over time, examining the impact of increased investments in training on hedging products as well as evidence for learning by doing among farmers. We find evidence that suggests that learning by doing is more effective at increasing both understanding and demand.

Keywords: India, South Asia, Asia, index insurance Economic theory, expected utility, weather index insurance, Risk, randomized experiment

Suggested Citation

Hill, Ruth Vargas and Robles, Luis Miguel and Ceballos, Francisco, Demand for Weather Hedges in India: An Empirical Exploration of Theoretical Predictions (July 1, 2013). IFPRI Discussion Paper No. 01280. Available at SSRN: https://ssrn.com/abstract=2310082 or http://dx.doi.org/10.2139/ssrn.2310082

Ruth Vargas Hill (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Luis Miguel Robles

World Bank Group ( email )

1818 H Street NW
Washington, DC 20433
United States

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

Francisco Ceballos

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

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